Since 2016, the penalty for estimated tax underpayments has steadily increased. The rate has doubled since 2015 after years of not changing at all. Taxpayers should pay close attention to this trend. It should no longer be taken lightly or ignored, and here’s why.
Today, we focus on the rising penalty associated with underpaying your estimated taxes.
The IRS calculates underpayment penalties separately for each required quarterly installment. First, it determines the amount of days late, then it multiplies that by the effective interest rate for the specific installment period. Those interest rates are announced by the IRS for each quarter.
As you can see in the table below, from 2012 to the first quarter of 2016 the rate has been a steady 3%. However, during the rest of 2016, all of 2017, and the first quarter of 2018, the rate increased to 4%. The last three quarters of 2018 increased again to 5%. Now, we see another increase in the first quarter of 2019 to 6%! Where will it go from here? If federal funds rates continue to increase, we would expect the underpayment penalty rates to increase too – since the trend of these rates generally coincide.
As the penalty rate continues to increase, so do the dollar amounts at stake if you fail to pay on schedule for each quarter. For those who actively decided to incur the penalty because the rate of return their assets earn is greater than the rate charged by the IRS, keep these increasing penalty rates in mind and be on the look-out for any further increases that might change your situation (and your decision). Also keep in mind that while this penalty is basically an interest charge, it is non-deductible.
The first estimated payment for 2019 is due April 15, 2019! In a previous blog post, we answered the who, what, when and why regarding estimated tax payments for individuals. Refer to this post for more in-depth information.
Remember, The Tax Warriors® at Drucker & Scaccetti are experts at helping clients manage their tax obligations, including quarterly estimated tax payments. Call on us for help.